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03529-9781451881899.Pdf 2004 International Monetary Fund January 2004 IMF Country Report No. 04/18 Indonesia: Eleventh Review Under the Extended Arrangement—Staff Report; and Press Release on the Executive Board Discussion In the context of the fourth review under the stand-by arrangement and request for waiver of performance criteria, the following documents have been released and are included in this package: • the staff report for the eleventh review under the extended arrangement, prepared by a staff team of the IMF, following discussions that ended on November 13, 2003, with the officials of Indonesia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 10, 2003 The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF. * a Press Release summarizing the views of the Executive Board as expressed during its December 19, 2003 discussion of the staff report that completed the review. The documents listed below have been separately released. Letter of Intent sent to the IMF by the authorities of Indonesia The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information. To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicyf2jimf.org. Copies of this report are available to the public from Internationa! Monetary Fund • Publication Services 700 19th Street, N.W. • Washington, D.C. 20431 Telephone: (202) 623-7430 • Telefax: (202) 623-7201 E-mail: [email protected] • Internet: http://www.imf.org Price: $15.00 a copy International Monetary Fund Washington, D.C. ©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND INDONESIA Eleventh Review Under the Extended Arrangement Prepared by the Asia and Pacific Department (In consultation with other departments) Approved by David Burton and Leslie Lipschitz December 10, 2003 • Discussions for the final review under the extended arrangement were held in Jakarta during November 3-13. The mission met with Coordinating Minister for Economic Affairs Dorodjatun Kuntjoro-Jakti, Minister of Finance Boediono, Minister of State-Owned Enterprises Laksamana Sukardi, Bank Indonesia Governor Burhanuddin Abdullah, other senior officials, parliamentarians, and representatives of the private sector, • The staff team comprised Messrs, Citrin (head), Schwartz, Bingham, Wolfson, and Ms, Richter Hume (all APD), Messrs. Baldacci (FAD) and Tadesse (PDR), and Ms. Fisher (Assistant, APD), and was assisted by Messrs. Nellor, Khatri, and Taylor of the Fund's Jakarta Office. The mission worked closely with overlapping FAD, LEG, and MFD technical assistance teams, and with the World Bank and AsDB. • The Extended Arrangement (SDR 3.6 billion) was approved on February 4> 2000, and was extended on January 28, 2002 by an additional year, through end-2003. Ten reviews have been completed and a total of SDR 3.3 billion has been purchased, bringing Indonesia's obligations to the Fund to SDR 6.7 billion (Annex I and Table 1). A purchase of SDR 344 million will become available on completion of the review. • In completing the last review (October 8, 2003), Directors welcomed the favorable progress under the program and were encouraged by the continued improvement in macroeconomic performance. They emphasized that maintaining sound policy implementation would be essential to preserving investor confidence after the Fund program concludes at the end of the year. Also, further progress was needed to strengthen the investment climate;, especially in the areas of governance and legal reform^ as economic growth remained below potential. Consistent and timely implementation of the economic strategy laid out in the government's "White Paper" would be key in this regard. • All end-September quantitative performance criteria were met, although the indicative target on base money was exceeded by a small margin (LOI, Table 1). Progress against the September structural benchmarks was also satisfactory (LOI, Table 2). In view of the continued progress in policy implementation, the staff supports the authoritiesJ request for completion of the review, • The attached report is an update of developments for the final program review. A more comprehensive assessment of economic developments and overall performance under the program will be provided at the time of the Article IV consultation in early 2004. ©International Monetary Fund. Not for Redistribution -2- Contents Page Executive Summary 3 I. Performance Under the Program and Economic Outlook 4 II. Policy Discussions 6 A. Macroeconomic Policies 7 B. Structural Reforms 11 III. Staff Appraisal 15 Box 1. 2004 Budget 9 Text Figures 1. Stock Market & Exchange Rate Developments 4 2. Government Bond Yield 5 3. Real Effective Exchange Rate 5 4. Interest Rates and Monetary Condition Index 7 Text Table 1. Fiscal Operations 8 Figure 1. Recent Macroeconomic Developments 17 Tables 1. Schedule of Reviews and Purchases 18 2. Selected Economic Indicators, 1998/99-2004 19 3. Balance of Payments, 2000-04 20 4. Monetary Survey, December 2002-December 2003 21 5. Summary of Central Government Operations, 2001-04 22 6. Structural Benchmarks 23 7. Medium-Term Fiscal Projections, 2001-05 24 8. Indicators of External Vulnerability, 1996/97-2003 25 9. Indicators of Debt Service to the Fund, 2001-10 26 Annex I. Fund Relations 27 Attachment Letter of Intent 29 ©International Monetary Fund. Not for Redistribution -3- EXECUTIVE SUMMARY Performance under the program • While macro economic developments continue to evolve in line with the program's objectives, investment has yet to revive as needed to boost long-term prospects. GDP growth edged up to 3.9 percent in the third quarter (year-on-year), driven by private consumption with investment remaining sluggish. Inflation continues to trend down, to 53 percent in November, and external reserves have risen further. Although still generally positive, financial market sentiment has cooled off. The rupiah is stable and the stock market has remained near a 3Vz year high, but government bond yields have risen sharply. • Macroeconomic policies are on track, and all end-September quantitative performance criteria were met with margins. However, the indicative target for base money was exceeded by a small margin. Key issues included: > With bond yields rising and base money growth increasing, the mission stressed that further interest rate cuts at this stage could put the recent gains in exchange rate stability and inflation at risk. The authorities agreed to maintain policy interest rates at current levels for the time being. > Fiscal policy remains on track to achieve the 2003 deficit target (1.9 percent of GDP), although revenues continue to underperform. The 2004 budget targets a further decline in the deficit to 1.3 percent of GDP, Nevertheless, the step-up in domestic financing (in the absence of debt rescheduling) will need to be managed carefully, • Performance against the program's structural benchmarks through September has been broadly satisfactory: > The bank divestment program is proceeding well, boosted by the IPO of state bank BRI, and IBRA recoveries should exceed the full-year target. Progress has also been made in strengthening the financial sector safety net and advancing privatization, > However, a recent scandal at bank BNI and continuing concerns about the state banks' growth strategies highlight the need to strengthen their accountability and governance. Further efforts are also needed on legal and other reforms to improve the investment climate, Post-program relations with the Fund • The authorities intend to maintain a close policy dialogue with the Fund in the context of Post Program Monitoring (PPM). In addition to safeguarding Fund resources, it is expected that PPM will provide the authorities with a useful external assessment of economic conditions and policy developments. • Two PPM Board meetings are anticipated in 2004. The first of these will coincide with the Article IV consultation, which will undertake a retrospective of Indonesia's recovery and policy performance. Staff visits will complement the PPM missions. ©International Monetary Fund. Not for Redistribution -4- I. PERFORMANCE UNDER THE PROGRAM AND ECONOMIC OUTLOOK 1. As the arrangement draws to a close, policy implementation has continued to be satisfactory, and the economic recovery is advancing. GDP growth is slowly gaining pace, inflation continues to decline, and a further increase in external reserves is helping to reduce the economy's vulnerability to external shocks. Nevertheless, significant challenges remain to maintain economic stability and investor confidence as the program ends and next year's elections draw near. Efforts to strengthen the investment climate also need to be intensified, as Indonesia continues to perform below its economic potential, Performance under the program 2. Macroeconomic developments have continued to evolve in line with the objectives under the program (Table 2 and Figure 1): • GDP growth in 2003 is still expected to be in the range of 3Vz to 4 percent. Growth in the third quarter rose to 3.9 percent (year-on-year) from 3.8 percent in the second quarter. With private consumption growth remaining strong^ GDP growth could reach the upper end of the range envisaged under the program. Investment remains sluggish, however (up less than 3 percent so far this year). • Inflation should end the year below 6 percent (in line with staff projections at the tenth review). Headline inflation dropped to 5.3 percent in November (year-on- year), from about 6 percent the previous two months, reflecting largely a decline in food price inflation. Core inflation was 7.0 percent, unchanged from October and down only slightly from 7.3 percent in September. • The external current account surplus is turning out higher than expected, but this has been offset by lower private capital inflows (Table 3). With gas exports and worker remittances running above target, the current account surplus has been revised upward further to $7^4 billion (3.5 percent of GDP).
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